Everything we do in life involves some risk. A high-risk activity that, for the large part, is taken for granted every day is driving our cars. Over the last two decades, we have seen an enormous leap in the number of car electromechanical devices to help us avoid accidents or protect ourselves. If you’ve only been driving for the last 20 years, you will take for granted that cars have seatbelts, antilock brakes, and airbags. All these items have evolved to protect us from injury, but the mere fact we know they are there also instills a greater level of security.
Go with me on this analogy of wearing a seatbelt.
I know the risks of driving and what could happen to me. I have no plan to crash whenever I drive my car. However, I’ll still wear my seatbelt, which gives me the confidence to go on the freeway. If there’s an incident, my antilock brakes help me stay in control. If there is a crash, my seatbelt is there, and of course, the airbags too.
If none of that equipment was in the car, I’d be driving around at 20kph and freaking out if any other road users came near me.
The protection gives me confidence.
So, linking all that back to investing. No matter what we decide to participate in, property, shares, or even bitcoin, there’s a risk, and it has always taken courage to invest. The fear of potentially taking a loss is too great for so many Australians that they’ll never end up investing. The result is missing out on building wealth and, ultimately, having the lifestyle or retirement of their dreams.
However, in the world of investing, we have our own versions of seatbelts, antilock brakes, and airbags. These all come under the heading of insurance.
The simple definition:
Insurance is an arrangement by which a company undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.
Are you appropriately insured?
In the event of an unforeseen circumstance, the general rule of thumb is to recover as soon as possible, ultimately not losing the assets you have built and certainly not leaving you and/or your loved ones facing mountains of debt.
So, let’s look at what I feel are some key insurances Australians should have.
1. Life Insurance
Life insurance works in the same way as car insurance. Basically, you pay a monthly premium to your insurer. If something goes wrong (inevitably, this being death), your life insurance provider helps cover the financial side for the previously agreed amount.
If you are single with no dependents, life insurance might not be important. But for those with a spouse, nine kids, three dogs, school fees, and a mortgage, life insurance is critical. Some policies also allow for a terminal illness diagnosis. This insurance will help ensure that your loved ones can plan ahead should that thing-nobody-wants-to-think-about actually happen.
2. Injury Insurance and Income Protection
This simple question will help you stop wasting time: How long could you last without your regular income?
Income insurance, or to use the correct industry name, Total Permanent Disability (TPD) insurance, provides for you if you were to become permanently disabled due to accident or illness and there’s no way for you to work in any capacity in an occupation based on your skills, training or experience. TPD insurance provides a lump sum payment for medical and rehabilitation treatments, and while life might not be the same as it was, you can make the most of it. You need to be employed and paid to apply for TPD. Standard income protection policies usually cover up to 70% of your gross wages for up to two years. If you are a family living off of one income or with large debt levels, I think income protection is a must-have.
3. Health Insurance
You might be in the prime of your life, feeling fit, healthy, and unbreakable, but health insurance offers a wide range of policies that will ensure you are not faced with an excessive medical bill should you become sick or injured.
Depending on your budget, various health insurance policies are available. The more events you want to be covered, the larger the monthly premium. These range from top private hospital cover to basic public hospital cover. All types are designed to help reduce medical expenses in the case of emergencies or to get more immediate hospital treatment.
Buying health insurance might mean you don’t have to pay the Medicare levy surcharge of up to 1.5% of your taxable income. The aim of the surcharge is to encourage anyone earning over $90,000p.a. to take out private hospital cover to reduce the demand on the public system.
4. Vehicle Insurance
We must have ‘Compulsory Third Party Insurance’ (CTP) to register any motor vehicle. It provides cover for people who may be injured or killed in a motor vehicle accident involving your vehicle.
Having no insurance or buying the minimum required coverage saves you money upfront but puts everything else you own at risk. If you are unfortunate to damage a vehicle used for work purposes, you can be liable for the loss of income from being out of service. Usually, car insurance does not cover your car for mechanical or computer failures or breakdowns unless caused by an accident. And don’t put the wrong fuel in your car… it’s not covered. If you are contemplating earning extra income from ridesharing, you’ll need to find suitable business-use insurance.
5. Landlords Insurance
I’m not listing building insurance because, whether you realise it or not, you must have the building insured as part of that agreement if you have a mortgage.
However, landlords insurance is not compulsory; if you are an investor, this is an absolute must. The best time to start is straight away, especially if it’s vacant and being advertised for rent because you have liability exposure from the moment the agent starts to show tenants through the property. You can be covered for loss of rental income if your tenant does a runner, defaults, fails to leave, dies, or the property can’t be inhabited during repairs. Remember that this is a tax-deductible business expense as it is part of your holding costs.
Insurance policies come in various shapes and sizes and boast many different features, benefits, and prices. Shop carefully, read the policies, and understand the coverage and the cost. Like so many things in life, the cheapest is not an indication of being the best.
If you run a business or have a lot of insurance requirements, I recommend using an insurance broker. They are industry-qualified experts who will deal with several insurance companies to find coverage that best suits your needs.
Owun is the Senior Education Specialist at the Blue Wealth Property Academy and hosts The Clever Investor podcast. He has worked in finance and property for well over 20 years and is known for his ability to explain the complex world of wealth creation in an easy-to-understand way.